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Benefits of Downward Earnings Management and Political Connection: Evidence from Government Subsidy and Market Pricing

Haiyan Jiang, Yuanyuan Hu, Honghui Zhang and Donghua Zhou

The International Journal of Accounting, 2018, vol. 53, issue 4, 255-273

Abstract: This paper examines the role of downward earnings management and political connection on the receipt of government subsidies and market pricing of subsidies. Using subsidies data hand-collected from Chinese listed firms over the period 2004–2014, the results show a significantly positive association between downward earnings management and the receipt of government subsidies. The results also reveal that a firm's political connection is conducive to securing subsidies for poor performers, but not for good performers. Market pricing analyses demonstrate that share markets value subsidies positively in general, but the effect is ameliorated in firms conducting downward earnings management. No discernible difference is found between the market pricing of subsidies received by firms with political connections and those without.

Keywords: Government subsidy; Earnings management; Political connection; Market pricing; China (search for similar items in EconPapers)
Date: 2018
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